The effect of political connections on firms' auditor choice decisions and audit opinions: evidence from Egypt

Abstract

PurposeThis paper aims to examine how different types of corporate political connections (PCs) affect auditor choice decisions (and, therefore, audit quality) and audit opinions following the 2013 Egyptian uprising.Design/methodology/approachThis paper utilizes a unique hand-collected dataset on the type of PCs of Egyptian listed companies from 2014 to 2019. Several analyses are employed to test the hypotheses, including logit regression, probit regression and generalized linear mixed models (GLMM). A number of additional analyses are conducted to ensure the robustness of the results, including the instrumental variables (IVs) probit models and propensity score matching (PSM).FindingsThe results show that firms' choice of auditor and audit opinion is heavily influenced by firms' PCs. Companies with PCs through boards of directors and major shareholders hire Big 4 audit firms to enhance corporate legitimacy; however, government-linked companies usually retain non-Big 4 audit firms to avoid increased transparency and to conceal improper activities, including tunneling and rent-seeking. Further, the results indicate that companies with PCs through boards of directors or major shareholders are more likely to receive favorable audit opinions, whereas government-owned businesses are less likely to receive such opinions.Research limitations/implicationsThis study provides additional evidence to policymakers that binding regulations and guidelines are necessary to oversee politically connected firms (PCFs) and to enhance governance and investor protection.Originality/valueThis study provides the first empirical evidence on how corporate PCs influence the choice of auditors and the opinions of audit firms in Egypt. This paper also sheds light on the impact of different types of corporate PCs on the choice of auditors and audit opinions.